Securitized banking, procyclical bank leverage, and financial instability

摘要

This paper provides a theoretical explanation of procyclical leverage of the broker dealer sector and examines its macroeconomic consequences within the context of the securitized banking system characterized by loan securitization and collateralized short-term borrowing. First, from a model of repo transaction, it is shown that a broker-dealer (repo borrower)'s optimal leverage is positively related to asset prices. The main mechanism underlying this relation is a movement of repo rate, which reflects counter-party risks and collateral value risks repo lenders are facing. Second, based on this result, I develop a macroeconomic model with a securitized banking system characterized by procyclical bank leverage and identify conditions under which the model exhibits a limit cycle behavior. A vulnerability of the repo market to asset price fluctuations leads to procyclical bank leverage, which aggravates asset price cycles driven by the supply-led credit expansion and collapse. It is also found that as the procyclicality of bank leverage becomes stronger the financial cycles also get more intense and severe. (C) 2018 Elsevier B.V. All rights reserved.